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Why Ethereum might be tough from here

ether (CRYPTO: ETH) is one of the most established cryptocurrencies available today and a leader in building utilities in cryptocurrencies. The market has rewarded that position with an Ethereum market cap of approximately $ 450 billion as of this writing.

As successful as Ethereum has been, competing cryptocurrencies are trying to improve on its major flaws. If Ethereum loses its user base and developer lead, it could crash Ethereum’s value. Even if you are optimistic about cryptocurrency, the downside is worth understanding.

Image source: Getty Images.

The utility advantage of Ethereum is being eroded

When Ethereum became popular, it was mainly because the cryptocurrency could include smart contracts. Selling NFTs could include original artist royalties, and commercial rights or access to digital platforms could be included in a sale. That’s a great benefit, but the gas fees Ethereum suffers today mean that small transactions aren’t even worth it on Ethereum.

Innovative projects are moving away from Ethereum towards platforms like Solana (CRYPTO: SOL) because the fees are much lower. While a simple transaction on Ethereum could cost $ 100, a transaction on Solana costs a few cents at most.

The same applies Cardano (CRYPTO: NO), Polygon (CRYPTO: MATIC), and Speckle (CRYPTO: POINT)who build all of their ecosystems for NFT marketplaces, decentralized exchanges, wallets and much more on lower-cost cryptocurrencies. The big projects and NFT artists will still be on Ethereum, but the upstarts are working on other cryptocurrencies. Given the early days of the industry, this should be a cause for concern.

Inactive

The costly challenge has long been known, which is why Ethereum is being upgraded to a proof-of-stake verification process. However, this upgrade has been delayed by months and won’t happen until 2022.

Once Ethereum moves to proof-of-stake it should cut costs and allow more transactions per second, but in the meantime it will allow other crypto ecosystems to develop. This is a problem as developers build on top of other cryptocurrencies and new users may be drawn to lower cost networks. For example, a new user investing $ 100 in cryptocurrency might not even be able to buy an NFT on Ethereum, but on Solana they could buy multiple NFTs and test the network and utility. Attracting new users is key to any business and any cryptocurrency. So if new users join other networks, it is a bad sign for the future of Ethereum.

The other side of the coin

I think these are very significant risks for Ethereum over the next year. But there are also reasons why cryptocurrency might appreciate that we shouldn’t overlook.

The first is that Ethereum is the second largest cryptocurrency in value and millions of people have an incentive to keep it that way. This includes early NFT projects, infrastructure companies, and investors. If the proof-of-stake upgrade comes relatively quickly, they can potentially keep other cryptos in check.

Another benefit is the first mover advantage that Ethereum has built with developers. The largest NFT marketplace is on Ethereum, it’s designed with smart contracts in mind, and other cryptocurrencies are built on top of it. Again, these benefits could expand if the proof-of-stake upgrades are completed on time.

Where is Ethereum going in 2022?

There are many unanswered questions for Ethereum in 2022. We know the network is about to upgrade, but it has been delayed several times so that other cryptocurrencies can expand their networks. But Ethereum also has a big head start in the crypto space and the second largest market cap with millions of dedicated followers.

I’m bullish on smart contracts and NFTs in the long term, but I think cryptocurrencies with high speeds, low transaction costs, and strong security will win in the long run. Ethereum is currently lacking in speed and cost, and while it does, investors should wonder if this is the best cryptocurrency for 2022.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all reflect critically about investing and make decisions that will help us get smarter, happier, and richer.

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